The government did a lot of crazy things in the name of neo-liberal ideology when it first came to power – often for the benefit of its big business benefactors at the expense of the citizens who elected it. Senior ministers – including Peter Costello, former finance minister John Fahey and former higher education minister David Kemp – grotesquely misconceived the role of government and completely failed to fulfil their duties to the people.
The result has been disaster for the nation and its people, yet the perpetrators blithely refuse to admit error, rethink their principles for policy, or even wipe the self-satisfied smirks off their faces.
The Herald’s political editor Geoff Kitney nails the government’s responsibility, in part, for the HIF debacle in his column “Clubbing together for a soft touch” (smh). Big company collapses, just like development planning disasters, usually have a long and murky history, and HIH is no exception. Geoff traces the influence FAI and HIH bought over the years through generous donations to and heavy-duty networking within the Liberal Party, and shows that if John Howard as treasurer had not backed FAI in the 1970s the pain of HIH insurance holders and the cost to taxpayers in higher premiums and downgraded insurance coverage for risk might have been avoided:
“Had it not been for a decision by then treasurer Howard in 1978, when he overruled doubts by the insurance industry regulator about FAI’s ability to conduct an insurance business so that Larry Adler could do so, FAI would never have entered the industry.”
The contemporary political crime is that of Peter Costello, architect and implementor of “reform” of financial industry regulation on the advice of Stan Wallis, then a big business guru, since overseer of two more corporate basket cases, AMP and Coles Myer.
Yes folks, it’s the old “soft-touch” regulation model so attractive to Labor in government (remember the abolition of the Australian Broadcasting Tribunal and its replacement with the pussy cat, powerless Australian Broadcasting Authority?) and then to the Coalition. APRA wasn’t a lame duck without reason – Costello’s reforms meant far fewer staff, a mandated culture of co-operation and hand-holding between the regulator and big business, and far too little time for the transition of power between the old and new regulators. As Geoff writes:
Set up by the Treasurer, Peter Costello, just weeks after the Government came into office, the Wallace inquiry concluded that prudential regulation which screened out riskier participants and reduced the likelihood an institution would fail “lessens competitive pressure and is a source of efficiency loss”.
Based on the Wallace recommendations, the Government scrapped the industry-specific system of regulation, replacing separate regulatory authorities for banking, credit union and building societies, superannuation and insurance with one financial system regulator, APRA. The new regulator’s brief was “soft surveillance of these institutions, with the emphasis on working with the industries on monitoring their financial condition and dealing with problems”…
The problem with all of this is that APRA was not even capable of carrying out its “soft touch” brief. To save money the Government gave the combined regulator 150 fewer staff than the former separate authorities. When the general insurance division was moved from Canberra to Sydney all but one of its experts resigned. When HIH was falling apart, five of eight positions in its industry monitoring division were vacant and none of the senior personnel had any experience with the insurance sector.
Little wonder it did not know what was going on. Which makes the Government’s washing its hands of any responsibility for the HIH disaster more than a bit rich.
The Australian Financial Review brought the matter even closer to the Treasurer today, with a story claiming Costello’s special big business advisory team for his financial reforms – the Financial Sector Advisory Council – told Treasury in 1999 “that HIH had been sharply undercutting insurance premiums in a bid to win business and that the whole sector needed monitoring”.
No wonder the government had to be pushed so hard to set up the Royal Commission! Yet not only is it not owning up to its role in the HIH collapse, it appears to have learnt nothing from it. Now the ACCC, a government regulator which takes its statutory obligations seriously and has done a great job in insisting that big business fulfils the ‘mutual obligations’ it owes to the community in exchange for neo-liberal policy, is under review. Big business pressure triggered the review – apparently competition policy is great until it suits the big boys to ‘soft touch’ its enforcement (for the beginnings of the big business push see Them and us,webdiary21Feb2001.)
The two other big management messes of Howard’s first term that come to my mind are IT outsourcing and the introduction of higher HECS rates to study maths and science.
The HECS decision was made on the basis that since it costs more to train mathematicians and scientists, they should pay more. The narrow focus of this cost-benefit analysis is almost criminal. The result is a collapse in enrolments for these two vital disciplines. Paying a penalty for a career that’s not highly paid is not something any government can expect most young people to do. Yet nothing has been done, and the system bleeds on.
And as Henry Ergas – the embodiment of pointy-headed economic rationalism – points out in a recent Business Review Weekly column, such crazy calculations proceed unchecked. Henry points out that the plan to refuse insurance coverage for dangerous pursuits like sky diving will mean fly-by-nighters will take over and the state will be saddled with the health bills of more accidents victims than before. Thanks Peter – you’re policies let HIH hold on too long, policy holders pay for it through levies on their policy premiums, and now you want them to pay more through reduced rights to compensation for injury caused by negligence! There’s got to be a better way – for example a low-cost, no fault compensation scheme for accident victims – but Peter Costello sure doesn’t want to think about it.
I sometimes wonder whether anyone in government these days cares about the public interest and really wants to work out good policy. Actually I don’t. They don’t.
IT outsourcing was John Fahey’s baby, assisted by Greg Barnes, now a member of the Democrats. It was pure ideology laced with short-term cost cutting and utter contempt for the public interest – including the legitimate expectation of citizens that personal information they’re forced to tell the state should not be handed over to the private sector. It led to maximum pain for government departments, a collective heart attack at the CSIRO, and a sensational lesson in the role of government from the head of the stock exchange, Richard Humphry. My feature on the policy, since dumped – again with no admission of mistake, no search for the lessons to be learned – follows.
I’ve argued for years that Labor needed, after government, to come up with some core principles about what government is for and why. It’s on a winner if it does, but it hasn’t.
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System error
by Margo Kingston, 20/01/2001
John Fahey has only himself to blame for the computer outsourcing debacle.
Imagine if the welfare cheques of the nation failed to arrive one Thursday. It would be both a human and political catastrophe. Yet such risks were inherent in the Federal Government’s policy of outsourcing its information technology systems to the private sector, a Government report has found.
The biggest management scandal of the Howard Government – its almost inexplicably inept handling of information technology outsourcing – could have continued unchecked had it not been for the courage of the mild-mannered Auditor-General, Pat Barrett.
Barrett’s damning audit of the Howard Government’s policy of outsourcing forced the Finance Minister, John Fahey, to commission a review by the managing director of the Australian Stock Exchange, Richard Humphry.
The report, released by the Finance Minister on Friday of last week at 6pm, paints a truly alarming scenario of the potential risks in outsourcing the Government’s giant computer systems to the private sector.
“Centrelink performs a critical function for Government: around 6.4 million customers per fortnight receive payments from Centrelink,” Humphry wrote. “Many of these payments are for the most disadvantaged people in the community, whose livelihood and wellbeing depend in varying degree on government assistance.”
There was therefore “no tolerance for transition errors, unplanned downtime and system instability”, otherwise outsourcing could see “a substantial impact on individuals, the community at large and the broader economy”.
Despite this, “implementation risks have been magnified and the management of those risks subjugated in the pursuit of a contracted outcome”.
The Government swiftly accepted Humphry’s recommendations and immediately halted the Centrelink tender. It’s also abandoned the broader policy by accepting his recommendations that government agencies not yet drawn into the outsourcing whirlpool be given the authority to decide if, when and how to proceed.
It is a major blow to one of the key ideological planks of the Howard Government’s administration.
In 1997, Fahey persuaded Cabinet to decree that his Office of Asset Sales and Information Technology Outsourcing arrange total IT outsourcing at Centrelink and every other government department within two years, regardless of their needs, their business or the specialised nature of their information. It banned departments making in-house bids for the work, despite the fact that their specialist expertise and lower salaries would, in some cases, have made them the cheapest bid. It grouped departments into six big clusters and began ramming through tenders according to ludicrously tight timetables.
Fahey claimed, without producing evidence, that this would save the Government $1 billion, and slashed departments’ present and future budgets to reflect his guesstimate.
Barrett found the Finance Department had then overstated actual savings using a form of accounting it allowed no other department to use.
In reality, savings so far were $30 million, after deducting a staggering $15.2 million bill paid to legal consultants appointed by Fahey without tender, but before quantifying what Humphry called outage and service difficulties and “the considerable effort and cost” incurred by departments during implementation.
Humphry was incredulous that the departments involved had no say on whether it was cost effective or whether risks outweighed benefits.
“The Centrelink Board,” he insisted, “would need to be convinced that all relevant risks are identified and appropriately managed before agreeing to proceed with implementation.”
He continued: “It is possible that some aspects of Centrelink’s IT infrastructure are not suited to outsourcing, [and] the adoption of a selective outsourcing approach stands the best chance of achieving an optimal result.”
But the very process set up by Fahey did not give them that discretion.
Before Fahey grudgingly accepted Humphry’s recommendations, he was prepared not just to endanger welfare payments, but also to set in train a brain drain from the public sector.
Humphry noted that in any of these fields, outsourcing would end Government expertise in vital scientific areas by forcing staff with a mix of scientific and IT expertise to go private.
On the Australian Nuclear Science and Technology Organisation (ANSTO), he said most IT systems “are directly linked to the monitoring of the nuclear reactor and security”. “In my opinion, this introduces special sensitivities which the chief executive should consider in assessing how ANSTO proceeds with outsourcing.”
CSIRO’s IT “is inherently research-oriented and does not easily lend itself to outsourcing. Much of the infrastructure forms part of the CSIRO’s core business in terms of specialist hardware and applications linked to highly specialised research. Communications links are also linked to research activities as well as universities engaged in collaborative research. In my opinion, this introduces special sensitivities …”
“Because of the time and safety critical nature” of the Bureau of Meteorology’s work, “it has developed a highly specialised technical infrastructure to provide critical meteorological data and information in real time. In my opinion this introduces special sensitivities …”.
On the IT outsourcing of law-enforcement agencies and the courts, Humphry saidthey “rely on high levels of security to protect sensitive data and electronic communications”.
“While it may be possible to outsource minor administrative components of these agencies, this may increase the risk of compromising security and exposing an agency to harmful consequences.”
The irony of a private-sector man such as Humphry explaining the concept of the public interest to government is frightening enough.
But before you breathe a sigh of relief that it’s all over, be aware that the IT infrastructure of the National Crime Authority, the Australian Tax Office, the Australian Electoral Commission and the Immigration Department has already gone under the hammer, with no protection for privacy.
The Privacy Act gives the right to complain to the Privacy Commissioner, get compensation, and ensure compliance only with respect to government agencies. There are no rights at all to take action against a private contractor.
In 1997, Fahey countered protests about the wipeout of citizen’s privacy rights by promising an urgent amendment to the Privacy Act, before contracts were signed, to extend its reach to contractors. The amendment was passed three years later, and will not come into effect until December this year.
Who can Fahey blame? No-one but himself and the Prime Minister. When he put up his Cabinet submission, every department bar his own and John Howard’s trenchantly opposed it.
Attorney-General’s warned of a privacy black hole, Treasury warned that “outsourcing posed major business and management risks without, in all cases, certain financial gains.” The Tax Office warned (correctly) of huge voluntary redundancy payments, costing government lots of cash to lose its expertise. Cabinet cleared the scheme, but left departments some discretion.
But when agencies such as the CSIRO said no, Howard stepped in, telling all departments in 1998 that outsourcing must proceed unless there was “a compelling business case [to be approved by Cabinet] for not doing so”.
The Office of Asset Sales used the prime ministerial backing to force the issue with recalcitrant departments.
The CSIRO tried to talk to Fahey about its special sensitivities but failed to make him understand, and the National Library and the Securities and Investments Commission demanded an indemnity from Fahey to protect it from future legal action before outsourcing. He refused.
No-one could make Fahey understand, and no wonder. Under questioning by Labor’s IT spokeswoman, Kate Lundy, in the Senate Estimates Committee, it was revealed that no-one in Finance or the Office of Asset Sales had anyone looking at best practice or overseas trends. The minister was flying blind.
If Fahey had bothered to look further afield, he’d have found that many private companies who outsourced IT were now “backsourcing”.
American studies have reported that economies of scale had proved illusory, senior executives were disturbed at their “lack of control”, and ambiguous contracts had led to protracted disagreements.
In making his findings, Humphry commissioned a report by the outsourcing expert Michael Reardon, whose checklist of best practice was broken on just about all counts by Fahey.
Reardon warned that outsourcing IT “involves a transfer of operational responsibility for an increasingly key business resource [and] failure to adequately address all the issues, and there are many, has the capability to seriously damage thebusiness”.
Despite agreeing to stop current tenders and let agencies decide how and what to outsource, Fahey insists that he’s already saved “hundreds of millions of dollars”. He also insists that “nothing’s changed in the policy”.
The business of government is government. Humphry’s dissection casts grave doubt on the Howard Government’s ability to manage the business for the long-term benefit of its shareholders, the Australian people. Unfortunately for John Fahey, in this case the bureaucracy was on the people’s side.